Of Potemkin Villages and Market Economies

At the height of the cold war, two powerful armies eyeballed each other across the world’s main conflict theatres. Each bristled with enough munitions to destroy the world several times over. MAD, as a description of the stasis (mutually assured destruction) that developed on the back of this relationship did not quite do the situation enough justice. But as with most easily told stories, beneath the NATO-Warsaw Pact face-off ran a much more nuanced undercurrent.

At this level, the battle was, at the risk of being simpler still, one between liberal democracy based on market economies, and a collectivist approach to organising societies. The United States of America was the standard bearer of the former perspective, while the Soviet Union led the latter. The Chinese, though, were bit players for much of the 70 years from the Great October Revolution in 1917 to the eventual collapse of the Berlin Wall in 1989. However, despite the ruse of the Non-Aligned Movement, the Chinese largely played their part of the game on the Soviet side of the divide.

Forward back to 1979. Deng Xiaoping, Secretary General of the Chinese Communist Party, persuaded that it doesn’t matter what colour a cat is so long as it is a good mouser, launched “Socialism with Chinese Characteristics”. Opening Mao’s hide-bound economy to both domestic entrepreneurs and foreign investment, Comrade Deng launched policy after policy that helped China move more people out of poverty in a far shorter period than has been achieved in modern times. Today, China is the second biggest economy in the world by any measure, and continues to threaten an eventual overhaul of the leader — the United States of America.

Russia, the rump of the former Soviet Union, on the other hand, may still be the U.S.’s only rival in terms of the number of ICBMs it can weaponise and deploy, but it is increasingly an economic tiddler. At US1.268tn, its annual output (2016 estimates) is much smaller than Brazil’s, Canada’s and India’s. Put simply, despite having been at the head of one of the most powerful military blocs in the run up to the 21st century, Russia is today basically a souped-up emerging market.

How come this change of fortunes?

Simple. While the Chinese embraced the market, foreign investment, new technologies, and foreign management styles, the Russians interpreted the loss of the cold war to their failed attempt at an earlier opening of their economy — Mikhail S. Gorbachev’s perestroika and glasnost — and sought instead an atavistic response. In Vladimir Putin, they found this response. A czar, able to allocate resources to his court, and projecting yesterday’s notion of power, the new monarchy in Russia continues to build its new space on Grigory Potemkin’s design for Empress Catherine II.

In this much narrow sense, both China and Russia are a cautionary fable for countries like ours still foraging for efficient paths out of underdevelopment. There are clearly few options more appropriate for the efficient allocation of scarce resources than the market. The opposite of this argument is that no matter how benign or wise a ruler is s/he is not always likely to succeed in choosing the best path for his/her society all the time. Unfortunately, whereas a market correction is often possible through adjusting relative prices, correcting for an errant autocrat is often a more expensive procedure.

That the market is impersonal enough to have many people drop off it is not in doubt. Nor is the point to be argued against that the market is often indifferent to the hardships that those who fall off its radar often suffer. Part of the shock of the resurgence in protectionist tendencies in the West is the result of the strength with which these latter points are made. But then, as the debate over healthcare reforms in the U.S. illustrate, the challenge of the sovereign in a market economy is not so much to impede the full functioning of the price mechanism. Instead, it is to build a safety net that gives all as occasionally fall victim of market forces a fighting chance.

In this sense, mankind could be said to have made giant leaps. For we tend to forget that poverty is a relative term. Compared with today’s affluent, much of mankind may be poorer. But against yesterday’s upper classes, a few of today’s poor are relatively well off. Our task as managers of economic spaces may, thus not be simply to close the gap between the rich and the poor. It might simply be enough to ensure that each generation of the poor can live much better than the preceding one.

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